Double-Talk In Houston -- February 23, 2016: A Freeze, But No Cut In Production

Updates

February 25, 2016:  It's now agreed -- the Saudi Surge was a direct assault on the US shale oil industry -- Bloomberg. Saudi says it was concerned about "all high cost" projects (US shale, Canadian oil sands, deep-sea off Brazil). Deep-sea off Brazil was already in trouble, and Canadian oil sands were facing headwinds of their own: landlocked; even higher-priced than US shale; Keystone XL killed).

Original

Oil & Gas Journal reports on the speech and comments given by Saudi's energy minister.

No cut, just a freeze. Maybe:

When asked about the recently announced deal reached by Saudi Arabia with three other producing countries to freeze production at January rates, Al-Naimi said it is the beginning of the process to rebalance supply and demand. “Cutting production is not going to happen,” he said. There will be another meeting next month, he said, to get more producing countries to agree to the freeze.

On markets:

What is different about this most recent and long-running downturn, Al-Naimi said, is that oil prices had reached a high-enough level that “every barrel on earth was being produced regardless of economics.” The solution, he said, is to get back to the marginal cost of development.  

No, every barrel on earth was being produced because Saudi let the price of oil spike to $140 making it economically feasible to go after "expensive oil" and in the process learn how to make the process economical even at $30. 

And exactly what is the marginal cost of development in Saudi Arabia? About $6.

On the right price of oil (sort of like determining the "right" global temperature):

When oil was fetching $100/bbl, Al-Naimi said, the price “seemed reasonable.” At that price, he said, investment was unleashed into normally uneconomic areas such as the Arctic, the Canadian oil sands, and the deepwater. This lead to the robust growth of supplies from both conventional and unconventional sources, he said.

What about market share?

Saudi Arabia’s oil policy remains multifaceted, Al-Naimi said. First and foremost, he said, the kingdom remains committed to meeting the demand of its customers. It also wants to maintain its level of spare capacity and will jump in during any type of crisis to meet the world’s demand. “We are not seeking market share,” he reinforced.

Really? That's not what Saudi Arabia has consistently said for the 16 months. Not only that, he said "market share" was the issue (see below).

War on shale? Of course not:

The oil market, Al-Naimi said, is much bigger than just the production coming from the members of the Organization of Petroleum Exporting Countries. The fact is, he said, that oil demand was, and remains, strong. The world’s daily demand of 90 million bbl should come from many sources of supply, including from shale plays. Al-Naimi adamantly denied that the kingdom has “declared war” on shale oil in the US and that it is simply trying to maintain its already-large market share.

Now we're back to Saudi Arabia "simply trying to maintain its 'already-large market share.'"

On solar energy: 

As for renewables, he sees solar as the answer for the future. He envisions the kingdom in the future being able to export the btu-equivalent of 7 million bo/d worth of solar.

Really? Saudi recently canceled a huge solar energy initiative because it was short of cash. But when they do start exporting 7 million bopd worth of solar, that's going to be one huge and very, very long transmission line.